Certificates of Deposit (CDs)
A time deposit that locks in a fixed interest rate for a set term in exchange for limited access to the funds.
What is it?
A CD is a deposit account that holds a fixed amount of money for a fixed period (the term) at a fixed interest rate.
How does it work?
You deposit a lump sum for an agreed term (e.g., 6 months to several years); the rate is locked in for that term, and early withdrawal typically triggers a penalty.
Why do people use it?
Used when a saver wants a guaranteed rate for a known period and doesn't need the money before the term ends.
Potential advantages
- Fixed, known interest rate for the term
- Generally FDIC- or NCUA-insured up to federal limits
- Often higher rates than a standard savings account
Potential disadvantages
- Early withdrawal generally incurs a penalty
- Funds are locked up for the term
- If rates rise after purchase, the CD doesn't benefit
Risks
- Interest-rate risk (locking in a rate that may be below future market rates)
- Liquidity risk if funds are needed before maturity
Quick facts
- Liquidity
- Low until maturity — early withdrawal is possible but generally penalized.
- Fees
- Early-withdrawal penalties (often a number of months' interest) are the primary cost; some CDs have no additional fees.
- Taxes
- Interest is generally taxable as ordinary income in the year earned, even if not withdrawn.
- Guarantees
- Deposits are generally insured up to federal limits (FDIC for banks, NCUA for credit unions).
- Non-guaranteed elements
- None on the rate itself once locked in — the rate is fixed for the term by contract.
- Time horizon
- Matches the CD's term — commonly a few months to several years.
- Who typically considers it
- Savers with a specific time horizon who want a guaranteed rate and don't need the funds before then.
- Who regulates it
- Banks are regulated by federal and state banking regulators; deposit insurance is administered by the FDIC (banks) or NCUA (credit unions).
Questions to ask a professional
- What is the early-withdrawal penalty?
- Does the rate compound, and how often?
- What happens automatically at maturity if I do nothing?
Sources
This is educational information, not a recommendation to buy, hold, or avoid this product. Whether it fits your situation depends on your goals, other holdings, and circumstances a licensed professional can help you evaluate.